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Lower interest rates, longer life spans give pensions double whammy

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Slammed by lower interest rates and adoption of new mortality assumptions reflecting longer life spans, funding levels of the largest U.S. corporate pension plans plunged in 2014, Towers Watson & Co. said Tuesday.

The New York-based benefit consulting firm’s analysis of financial statements filed by sponsors of the 100 largest pension programs found that plans on average were 82.2% funded at the end of 2014, down sharply from 2013’s average 90.2% funded level.

At just over 82%, plan funding levels still are higher compared to 2008 when funding tumbled to an average of 74.6% — down from just under 103% at the end of 2007 — when the equity markets plunged during the Great Recession.

Just as rising interest rates in 2013 helped to fuel a big improvement in the plans’ average funding levels — up 13 percentage points from 2012 — falling interest rates, which inflated the value of plan liabilities, was a key reason for 2014’s sharp decline in funding levels.

In 2014, the average interest rate fell by 83 basis points to 4.02% from 4.85%, boosting plan liabilities by 10%, according to Towers Watson.

In addition, the vast majority of plan sponsors last year adopted new Society of Actuaries’ mortality tables that reflect increases in longevity, boosting the number of years employers will have to pay out benefits to plan participants. Adoption of those assumptions increased plan liabilities by 4.3%.

In all, the plans’ aggregate funding deficit widened to $248.2 billion in 2014, up sharply from $127.9 billion in 2013.

In addition, just six employers had fully or overfunded pension programs, down from 19 in 2013 and 51 in 2007 — just before the big tumble in the equities markets. In addition, just six employers had pension programs that were between 95% and 99.9% funded, down from 13 the prior year.

On the other hand, 20 employer pension programs were between 75.5% and 79.9% funded last year, up from nine in 2013.

To reduce the financial risks associated with offering defined benefit plans, a fairly significant percentage of big employers took steps to “de-risk” their pension plans. Twenty-three of the 100 plan sponsors offered eligible plan participants the opportunity to convert their annuity to a cash lump sum or shifted liabilities to insurers through the purchase of group annuities, Towers Watson said in the analysis.